Board Topic: Condo/Multifamily financing
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Posted by: will1 Sep 14 2004, 04:56 PM


I am working on a project that currently slated as 80% condo sales units and 20% market-rate rentals, in the same building.

My question is wether the two uses would be financed seperately(1st mortgage on the condos, and 2nd mortgage on the Rentals).

If so, what would a typical financing arrangement be for the building? (Assume a well qualified-backed developer)
For the Condo units?
LTV requirements? Interest Rate? Term?

Multifamily portion?
LTV: 15% Interest Rate? Term?



Posted by: loanuniverse Sep 14 2004, 08:23 PM

I am confused…. Is this a construction loan? If it is a construction loan, we are talking about a regular construction structure. Most of the loan will be repaid with the sale of the condo units. In fact, if there is only 20% of the units remaining, there is a big possibility that the proceeds from the sale of the condos will pay the financing in full and you end up with those units free and clear. On the other hand, rental construction financing is usually replaced by permanent financing at the end of the construction.

No need to separate them. A first position lien on the property will secure the whole project.

Regarding term and structure, the numbers I give you are not indicative of what you could get from another lender {bank or non-bank}, but if you were a established developer with lots of experience as well as strong financial condition, I could see someone like my employer looking to offer you something in the neighborhood of:

Up to 75% loan-to-value and 80% loan-to-cost.
An interest rate anywhere from prime to prime + 2% during construction

Now this doesn’t mean you will get this pricing.

Good luck

Posted by: will1 Sep 16 2004, 10:58 AM
In my financial feasibility analysis I am using just the permanent loan information. It actually gets a little more complicated, the 20% of remaining housing is affordable housing, so that will be financed through different means. The real essence of this project is "mixed-income" There is one level of ground-level Retail, market-rate rental or for sale housing(condos) and affordable housing.

In creating the proforma would you suggest that I separate all these different types of per their uses? (ie. development budgets, income statements, etc.) If you have seen or reviewed commercial projects with this type of development(ie. mixed-income) and can offer any advice on the proforma generation to show feasibility it would be appreciated. Thanks!

Posted by: loanuniverse Sep 16 2004, 12:24 PM

It would help me answer if you could tell me from what angle you are approaching this. From what I read in your original post, you were looking to find out what kind of financing would usually be established for a project of this type. However, your second post indicates that you are only looking at the “permanent financing information”. You even threw in that the low-income housing portion is going to be financed in other ways.

If the construction financing is already in place, then how is it going to get repaid?

If you are selling some of the units, then all you need to worry about is repaying the loan on the remaining rentals as far as debt service is concerned, right?

I would create a projection that segregates all my sources of revenue. Although, some units are sold, I am sure that there is still some kind of revenue in the form of “maintenance/common areas fees”, you also got your rental income from those units rented at market rates as well as those from low-income housing.

What kind of development budget are you talking about? This confuses me, because you said that you are only looking at permanent financing.

Assuming that you are looking at this from start to finish, I would approach it as follows:

1---You need an acquisition and development loan. The loan does not have to provide all of the sources of funds for the project, but must provide wathever is not covered by the low-income housing financing.

2---Your loan needs to be structured in a way that allows for enough marketing time to sell the units and lease-up the ones remaining.

3---At the end of the loan, the outstanding should have been reduced considerably reflecting only the units which remain.

4---This is where your projected income statement for the project kicks in, and should reflect sufficient repayment capability for the permanent financing.

If you are going to keep all of the units, then disregard #3. And to make it easy to understand showing the different revenue streams like you suggest would be a good idea.

I hope I understood your question.

Posted by: Newcomer Sep 16 2004, 03:15 PM

Excellent post.

While it seems to be quite complex on the surface, I think with experience this can be routine. It makes perfect sense. The benifits I see are:

- Opportunity to pre-sell the condo units. No cash out of pocket until you have X amount sold.
- Consistant revenue generation from the remaining 20% rentals.
- Not waiting 25 years to pay down principal. Owning outright much quicker.

You would need to own the land first, have plans drawn up by an architect, then pre-sell as many condo units as possible. Is this a correct assumption? THEN you would go to the bank and arranage financing. To me this seems straight forward.

Your thoughts Admin? I would love to hear your ideas.

- Newcomer

Posted by: loanuniverse Sep 17 2004, 08:56 AM

My first thought is that if anyone is thinking of investing in real estate, they should start with buying into property that is already developed and has established rental income. Sure, potential for profit is lower, but achieving an 8% to 12% ROI in today’s market is pretty decent, and we are not even counting on value appreciation.

Of course, the relationship between risk and reward can not be separated and doing developing or just speculating on raw land can bring you a much better return.

Regarding your assumptions:

- It is not necessary to own the land first, but it helps because of the preparation time required to put something like this together {plans, permits, pre-construction sales, etc} does take some time, and with a time limited purchase contract you need to move.

- Pre-sold units are a big plus. In fact, most construction loans of this nature require a percentage of the units being pre-sold to qualified buyers “as determined by the lender” before the loan closes.

- Analyzing the collateral for a land loan is straight forward and easy. For small loans {under a couple of million}, I really don’t have a problem with leaving the closing subject to a loan-to-value and a satisfactory appraisal. This means that the underwriting is not going to be held up by the lack of an appraisal.

- Analyzing the collateral for a development {a condo tower, a row of townhouses or a bunch of single families} is pretty complex, and I usually wait for the appraisal to add value to the underwriting. This means your loan has to wait 45 days {on average} before I get the appraisal back.

Posted by: Newcomer Sep 18 2004, 02:06 PM

Thanks Admin, your comments are on the money. I'm not planning to do a large devlopment like that quite yet, rather thinking future plans. Established properties with excellent track records like Appartment complexes are what I am planning to start with. The risk/reward scenario is different from building condo units, so the profits wont be as high. However I feel that starting with something pre-established as you mentioned is a great way to minimize risk and still get my feet wet.

Thanks for the insight.

- Newcomer


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